US Tax Filing Requirement

All US citizens, tax residents and green card holders are required to file tax returns and pay their taxes to the United States of America. If you belong to any of these categories, regardless of your place of residence and where you receive your income, then you are covered by this US IRS directive. You are a tax resident if you measure up to the test on substantial presence for every calendar year. Income that is subject to tax includes, salaries, wages, dividends, interests, capital losses and gains, business revenues, unemployment compensation, rental income and other types of income.

Penalty for non-filing and payment of taxes

If you are a green cardholder, the consequences of non-filing and payment of taxes could include the non-renewal of your green card or denial of your application for citizenship. In fact, the Government Accountability Office came out with a report stating that Congress may enact a law that allows the State Department to work closely with the IRS resulting in the denial of the renewal of passports of tax offenders.

Date of filing

Federal tax returns need to be filed on or before April 15 of the current year after the taxable year. But if you have no tax due and you are presently residing overseas, you are given until June 15 to file your Federal tax returns. If you fail to file on time, you can request for another six month extension to file your Federal taxes on your own.

Exclusion of Foreign Income

If you are a US person and you meet the “Physical Presence Test” or the “Bona Fide Resident Test” you may avail of the Foreign Housing Exclusion Act and Foreign Earned Income Exclusion Acts.

Foreign Income and expenses that are eligible under these acts are as follows:

Generally, foreign earned income embraces salaries, wages, professional fees or other payments obtained for personal services executed or done overseas

Car, home, and a range of other reimbursements and allowances called “Non cash income”

Rent expense that include rent of accessories and furniture

Repairs

Fair market value of employer provided housing

Utilities except telephone charges

Residential Parking

Fees for obtaining a lease hold that is not refundable

The maximum exemption for tax year 2010 is $91,500.

If you are a US person you are required to file Form TD 90-22.1, or FBAR (Report of Foreign Bank and Financial Accounts) where you need to list down your direct and indirect financial interest in, or signature authority for a foreign financial account with a combined annual total of $10,000 in any calendar year.

If you have an undisclosed foreign asset, the 2011 OVDI or Offshore Voluntary Disclosure Initiative requires you to report this on or before August 31, 2011. If you have not filed, you are still advised to comply with this reporting and filing requirement.

The purpose of the 2011 OVDI is to ferret out and force taxpayers who have used undisclosed foreign entities or foreign accounts to evade taxes to comply with US Tax Laws. Filing, even at this late hour will help you avoid considerable civil penalties and normally prevent you from being criminally prosecuted.

The IRS is resolutely determined to search for taxpayers with undisclosed foreign accounts. There is nowhere for you to hide since the IRS has the means to obtain this information either through tax treaties or from reports of whistleblowers. In addition, when the of FATCA or Foreign Account Tax Compliance Act and the Foreign Financial Asset Reporting become in force, information will become more easily accessible to the IRS.

Other Information

Once you decide to file for the foreign earned income exclusion, you cannot claim the foreign taxes on that income as a deduction. But what you will save on the income exclusion will usually be more than the foreign taxes that you cannot claim as deduction

Together with the income exclusion, you can still claim other credits such as the “Government Retiree” credit, the “Making Work Pay” credit the “Foreign Housing Deduction” and other IRA deductions

You must also include in your claim for foreign earned income exclusion all self-employed income you have earned during the previous year.

(If you have any questions, please contact us immediately so that we can help you to better understand your tax filing and reporting needs).

Eric La CaraManaging Partner and Tax Practice manager for Capital Tax in Vancouver and Tokyo. Eric is a U.S. and Japan Personal & Corporate tax specialist with more than 15 years of experience in the area of cross-border structuring and taxation. Eric is charged with developing Capital Tax overall operations and strategic direction using the business and technical skills he has acquired during his professional career in Asia.